Iron ore rebound may help ASX 200 futures power through the 'death zone'

• ASX 200 SPI futures trade above 8000, a level that has stifled bullish moves in 2024
• Technicals and macro conditions point to further upside, but bank valuations are already rich
• Iron ore prices may determine whether we see record highs given the implications for locally listed producers BHP, RIO and FMG

Overview

Australian ASX 200 SPI futures are attempting to do something they’ve never done before: successfully close the week above 8000 points. With extremely rich valuations in the local banking sector, it will likely require sentiment towards a soft landing for the global economy to be sustained, or a big bounce in iron ore futures, to make this attempt successful where so many others have failed.  

ASX 200 SPI futures enter “death zone” for bulls

The SPI weekly chart reveals probes towards and above 8000 have been akin to a “death zone” for bulls to borrow an analogy from mountain climbing, starving rallies of oxygen. The red dots underline just how formidable this zone has been, delivering so many reversal patterns, especially in the past few months.

However, as indicated by the green dots, there’s also no shortage of dip buyers lurking around 7500, where bullish advances were repeatedly rejected between 2021 to 2023. That’s now reverted to being support rather than resistance, providing an obvious range for traders to play this year.

But having closed last week at the highest level on record, the question now is will this thrust through 8000 stick, paving the way for a retest of the record highs at 8121?

Technicals, macro conditions look favourable

The sharp reversal from a dip below 7500 earlier this month suggests this attempt may succeed where others have failed, with the bullish engulfing candle of the following week encouraging further buying. MACD has generated a bullish signal, a move which has been confirmed by RSI (14) which has broken its downtrend. The only area of concern is a lack of volumes underpinning the move over the past two weeks.

With no top tier data in the United States until Thursday, from a macro perspective, the soft landing narrative may also have room to thrive, providing another potential tailwind for upside.

But banks look bloated…

However, as this chart from Morgan Stanley shows, valuations for the largest sector in the underlying ASX 200 – financials – are anything but cheap, with forward price-to-earnings ratios sitting not only at record highs but well above historic norms. You have to wonder just how much upside there is for the banks at these eye-watering valuations?

Source: Morgan Stanley 

…leaving iron ore to power upside

For a sustained push higher for ASX 200 SPI futures, it suggests other sectors may have help power it. Given it’s the second largest weighting behind financials, it may well have to be the materials space, putting extra emphasis on the performance of iron ore futures given the flow-through effects to giant producers BHP, Rio Tinto and Fortescue.

Just a fortnight ago SGX iron ore looked horrible on the daily, tumbling to fresh multi-year lows on weakness in Chinese steel mill profit margins. However, the picture has brightened somewhat over the past week with the price climbing back above the April low of $95.40, trading in a range just below $100. While yet to be completed, today’s candle will be a bullish engulfing if it manages to close around these levels, pointing to the risk of a push back above $100 with MACD and RSI (14) generating bullish signals on momentum.

But to get really excited about the prospect of a sustained push higher for both iron ore futures, miners and SPI futures, the price really needs to break and close above the 50-day moving average and downtrend dating back to May. If that were to go, a push above $105.75 would break the sequence of lower cycle highs, improving the technical picture for a medium-term upside.

-- Written by David Scutt

Follow David on Twitter @scutty